In Junea managing director of an "active investor" hedge fund is considering the possible gains from increasing the debt capitalization of The Wm.
Get Full Essay Get access to this section to get all help you need with your essay and educational issues. It explores two alternate means of allocation for the funds; pay out a one-time dividend or carry out a share repurchase.
Both methods are analyzed in regards to an optimal capital structure and maximizing share holder value value of the firm.
A compilation of historical data and future predictions were used for the basis of this report, and recommendations. A further discussion of agency costs and incentives by Jensen, Mecklingand Lenland will evaluate the relative impact of these risks on re-structuring. Once distributed between shareholders, reflects the following: However, WACC is seen to increase marginally by 0.
This can be attributed to a possible insufficiency of the debt tax shield to offset the costs of interest payments, along with the levered beta of 0. In terms of share-repurchasing alternative, the market value and book-value of equity sees a proportionate drop.
Due to the number of shares outstanding dropping from Pre-capitalization EPS was at 1. However, due to the interest payments net income was lowered causing EPS to drop considerably to 0.
Using the funds to repurchase shares also saw a drop in EPS down to 0. As such, following a re-purchase of Company can be seen to cause a structurally significant impact on both the short and long term operations. As such, there are many implications that have been taken into consideration as to the viability and subsequent sustainability of the debt issue.
In regards to cost of capital, WACC was seen to increase by 0. While these may seem detrimental in the short term, long term estimates point to an increased benefit. From the two alternatives given, an explicit preference is clear to see. With the dividend alternative, the loss of share price value and dramatic decline in EPS value will be likely to result in a negative market sentiment.
Also, the provision of a large dividend payment is unsustainable to maintain. In respect to the alternative of a re-purchase scheme, while the EPS does show a considerable decline at first, long-term growth in earnings are seen to increase exponentially as the benefits of the tax shield reflects in a higher EPS.
In this case, value maximization out of the two options is better achieved through the repurchase method. With financial policy objectives, a focal point is placed on maximizing shareholder value. Repurchase over Dividend Alternative: Financial Distress and Corporate Performance.
The Journal of Finance, 49 3 The Journal of Economic Perspectives, 15 2 Corporate Income Taxes and the Cost of Capital: The American Economic Review, 53 3 The American Economic Review, 48 3 The Journal of Finance, 53 4 Treatment of financing mix in analyzing investment opportunities.
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COMPANY CAPITAL STRUCTURE, VALUATION AND COST OF CAPITAL WRIGLEY JR. COMPANY CAPITAL STRUCTURE, VALUATION AND COST OF . In June , a managing director of an "active investor" hedge fund is considering the possible gains from increasing the debt capitalization of The Wm. Wrigley Jr. Company. Wrigley has been conservatively financed, and at the date of the case, carries no debt.